| | | | | The Bank of England (BOE) blinked last night.
It pledged to buy as many long-term Gilts (that’s lingo for UK government bonds) as it takes to bail-out the UK pension plan.
You see, pension liabilities (the present value of all the promises the humble saps who work for them expect to receive in retirement) rise when interest rates fall. The trustees of the plan must have locked in the value of those liabilities with hedges.
And I bet they did it at their peak when interest rates were at rock bottom low.
Anyhow, the recent surge in interest rates since inflation took off has reduced the value of those liabilities. This, in essence, made money for the plan.
Meanwhile, the hedges lost money — as they should.
So far, so good.
But…those liabilities don’t throw off cash. They are also as illiquid as you get, so they can’t be sold for cash. The hedges, on the other hand, need cash now to maintain account margins just like you need to add cash when you buy stocks on margin and the price moves against you.
Well, the plan must have been in a real pickle, for sure. Hence the need for the BOE to buy Gilts, bring down rates, and bail them out.
And, just like that, you have the first central bank finger to get plugged in the global financial contagion dike.
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